Providing Insights that Contribute to Better Health Policy

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espite concerns that an economic downturn would prompt employers to rein in
rapidly rising health insurance premiums by radically reducing benefits, few have
made dramatic benefit changes, according to findings from the Center for Studying
Health System Changes (HSC) 2002-03 site visits to 12 nationally representative
communities. Key employer changes focused on increasing patient cost sharing and
revising family coverage policies. Few employers adopted innovative health benefit
strategies or major design changes. Given employers lack of confidence in alternative
strategies and their unwillingness to restrict workers choice of providers, employers
will likely continue incremental cost-sharing increases in the face of ongoing
premium increases.

Employers Incrementally Raise Cost Sharing

mployers faced rapidly rising health
insurance premiums in recent
years, with three consecutive years of
double-digit increases, culminating in
2003 with a 13.9 percent increasethe
largest annual increase since 1990.1
Noting the slowing economy, many
observers predicted that employers
would dramatically increase employees
share of health care costs or even
abandon health benefits altogether. But
employers responded to rapidly rising
premiums with incremental changes,
according to findings from HSCs 2002-
03 site visits to 12 nationally representative
communities (see Data Source).

The major employer strategy was
to increase employee cost sharing
moderately, either by passing on a
larger share of premiums to workers or
by increasing copayments, deductibles
and coinsurancewhere patients pay
a percentage of the total cost of care.
The specific changes adopted depended
in large part on employers existing
benefit design:

Employers who were still paying the
full premiumtypically large, public
employers and those with a unionized
workforcebegan requiring
employees for the first time to contribute
toward their health insurance.
For example, instead of the employer
paying the full premium, an employee
might be required to contribute 10
percent of the premium. In contrast,
the typical employer already required
workers to contribute 20 to 40 percent
toward their health insurance premiums,
and these employers did not
change the contribution percentage.

Employers with modest patient
copayments increased them. For
example, employers that had
offered options with $5 office visit
copayments doubled them to $10.
Employers with office visit copayments
of $10 doubled them to $20
and introduced new copayments for
particular services such as specialist
care, urgent care and outpatient
surgery. Copayments for emergency
department visits also were doubled, for
example, increasing from $25 to $50 or
from $80 to $150. Per-day copayments for
inpatient hospital stays often replaced peradmission
copayments.

A few employers that already had high
copayments replaced them with coinsurance.

Increases in employees copayments,
deductibles and coinsurance essentially
reduced the level of benefits in exchange for
lower premiums. Nationally, employers are
estimated to have reduced health benefits to
"buy down" their insurance premiums by 2
percent to 3 percent in 2002 and by roughly
an additional 3 percent in 2003.2

Choice at a Price

mployers noted that two of employees
biggest concerns were the cost of health care
and having access to their choice of physicians
and hospitals. Although broad provider networks
are costly, employers were unwilling to
risk employee discontent by returning to
tightly managed care, calling the possibility
of limiting networks a "nonstarter" and
explaining that giving employees less than
full choice would be a "bitter pill." As a result,
health benefit managers maintained workers
access to broad networks but required workers
to pay more.

Despite health benefit managers embrace
of increased cost sharing, few considered this
approach the ultimate solution to rising health
care costs. Some were beginning to question
whether the complexity of the benefit changes
and the educational campaigns warranted the
few percentage point reductions in premiums.
Others were reluctant to burden employees
with increases to cost sharing for health care
at the same time they were withholding pay
increases.

While almost all employers increased
workers share of total costs, the proportion
borne by employees varied substantially across
communities and employers. In contrast to
Seattle and Boston, markets with historically
rich health benefits, Greenville and Little
Rock employees already shouldered relatively
large shares of their health benefit costs. For
example, one Greenville employer covered 60
percent of workers health care costs and
planned to reduce this amount to 50 percent.
In addition, workers in small firms typically
pay a greater share of their health care costs
compared with public employees and workers
in large national companies.

Grappling with Family Coverage

amily coverage was an area of focus for many
employers in 2002-03. Some employers promoted
public insurance as an alternate source
of coverage for children of their low-income
employees (see box). Many reported
modifying family coverage or planning to do
so, using one of two strategies: (1) changing
relative premium subsidies between single and
family coverage and (2) encouraging workers
spouses to obtain coverage through their own
employers when possible.

Rising premiums led some employers to
change how they structured and paid for
family coverage. For example, one company
that had contributed 92 percent toward both
single and family coverage now pays 90 percent
of the premium for single coverage and 70
percent of the premium for family coverage.
Alternatively, employers added a new category
under family coverage to differentiate families
that include the worker, spouse and dependents
from those that consist of just the worker and
dependents. Such policies typically helped
lower premium costs for single parents, while
helping employers reduce total payments for
health insurance. In contrast, one employer
that previously had provided no subsidy for
dependent coverage added one to help make
coverage more affordable for employees with
children.

In addition, employers adopted a variety of
approaches to encourage employees spouses to
accept coverage through their own employers.
Employers with rich benefit packages, in
particular, complained that they carried an
"excessive load" of dependents or were "subsidizing"
other employers. Strategies to limit
spousal coverage included:

Refusing to cover spouses unless the
employee showed proof that the spouse
could not enroll elsewhere;

Imposing financial penalties for spouses
who have access to their own employersponsored
insurance;

Requiring a significantly higher premium
contribution for a spouse; and

Offering employees a spending account for
out-of-pocket expenses if the spouse selected
coverage through his or her employer.

One employer began requiring employees
spouses to sign up with their own employers
health plan if the annual cost was less than
$600. This employers rich benefits and zero
premium sharing reportedly had prompted
extensive spousal coverage, but after the policy
was instituted, half of the employees with
family coverage dropped their spouses from
the plan. Another approach was to encourage
workers to obtain coverage through their
spouses, offering extra pay for employees
who enrolled elsewhere.

Employers Steer Employees to SCHIP

One employer response to rising premiums identified in HSCs 2002-03 site visits was the
promotion of the State Childrens Health Insurance Program (SCHIP) as an alternate source
of coverage for low-income workers children. Employers in three of the 12 marketsMiami, Cleveland and Phoenixhad adopted this approach.

The strategy was most widely reported in Miami, where the Chamber of Commerce
publicized Floridas program, KidCare, in a letter to 6,000 small employers and the county
Department of Health promoted the program to small businesses.Moreover, the Miami-Dade
School District, which faced a drastic 85 percent premium increase in just one year, provided
information about KidCare to help employees who would have difficulty paying their
share of the family premium. The school district also created a short-term special exception
to its benefit policy to allow employees to re-enroll a child after the open enrollment deadline
in case the child was deemed ineligible for KidCare.

By design, SCHIP has sought to discourage enrollment of children with access to
employer-based coverage. Some states require the child to be uninsured for three to six
months before becoming eligible for SCHIP, particularly if the childs parent voluntarily
dropped employer-based coverage. But other states only require the child to be uninsured
at the time of enrollment. The communities where employers promoted SCHIP enrollment
were in states with more lenient enrollment requirements. In fact, Florida recently tightened
KidCare eligibility requirements to exclude anyone with access to employer-sponsored
coverage unless it would cost more than 5 percent of family income.

Few Innovations or Major Changes in Benefit Design

uring the previous round of site visits in
2000-01, employers predicted they would have
to drastically change health benefit offerings
if premiums continued to rise. Despite this
warning,most employers ultimately favored
a more conservative approach and did not
make changes of the scope predicted. In fact,
only one employer reported significantly
restructuring its health benefit design in
response to rising premiums. That employer
revised its benefit offering to increase
employees share of health care costs by 40
percent and offered its employees a choice
between a preferred provider organization
(PPO) and a consumer-driven health plan
with comparable out-of-pocket costs. For the
PPO, deductibles increased from $50 to $300
for single coverage and from $150 to $900 for
families.

A few large employers focused on improving
the quality of care as a long-term strategy to
control costs. For example, one particularly
innovative employer was creating an array of
decision-support tools for employees, including
providing access to nurse coaches to help high
service users navigate the care delivery system
and making available treatment protocols for
certain conditions. This employers health
benefit manager explained that "consumer
engagement is not a panacea, but it is a necessary
condition for appropriate cost control
in the long run."

A handful of other large employers were
tailoring disease management, health risk
appraisals and wellness programs to their
workforces as their primary long-term strategy
to control costs. These efforts focused on
disease prevention by promoting healthy
lifestyles and cost containment by carefully
managing chronic care. By analyzing their
own claims data, employers identified which
services and diagnoses led to their highest
costs and then tailored disease management
and cost sharing designs accordingly. Some
employers were opting to self insure to gain
access to their claims data to develop such
programs, although their ability to generate
cost savings remains to be seen.3

Some employers focused attention on
administrative cost savings. Abandoning the
model of trying to contain costs by offering
products from different carriers that compete
on price and quality, these employers opted
to develop a long-term relationship with a
single carrier. They believed this gave them
more leverage in premium negotiations,
facilitated customer service and lowered
administrative costs.

Yet, most employers see no viable alternatives
on the horizon.Unlike in the early 1990s,when
employers embraced managed cares promise
of cost control and quality improvement, most
employers today see no innovative idea or
model that inspires enough confidence to
motivate reform.Moreover, expectations that
labor markets will remain relatively tight in
the near future make employers even more
cautious about adopting changes that will spark
employee discontent. Under the continued
pressure of rising premiums, employers will
likely further increase workers share of health
care costs, even as the economy recovers.

Although employers benefit changes
are incremental, the combination of large
increases in premiums and modest increases
in patient cost sharing is leading to financial
hardship for some workers and has likely
caused some to drop coverage or delay seeking
needed care. Furthermore, research has shown
that increased cost sharing leads to reductions
in both needed and discretionary care, making
it a blunt tool to achieve cost savings.4 For the
future, some health plans and employers are
refining cost-sharing approaches to encourage
patients to seek efficient providers, choose
effective treatment options and obtain care
in the most cost-effective setting.5 But how
soon these refinements will be developed,
how widely they will be accepted and how
effective they will be at controlling health
care costs remain to be seen.